The Minimum Wage and How Teens Learn to Work

President Obama, in his State of the Union address this month, proposed raising the minimum wage to $9 an hour. As recently as 2006, that rate was $5.15. It’s been at its current level of $7.25 only since July 2009. The next day, as if not to be outdone, two Minnesota state legislators proposed raising Minnesota’s minimum wage to $9.50 per hour from $6.15 presently (Minnesota businesses currently follow the federal minimum).

After years of consensus among economists on the effects of the minimum wage, the last 20 years has seen renewed debate over whether minimum wage laws reduce employment, even for low-skilled workers. The debate turns on a set of case studies where the number of workers hired in a particular industry, such as fast-food chain restaurants, did not fall as a result of an increase in the minimum wage in one state versus another. Broader studies consistently find disemployment of lower-skilled workers, though the size of the effect is not as large as originally thought.

Still, an increase in minimum wages in Minnesota from $6.15 to $9.50 is a large increase. By my estimate, that total effect reduces teen employment by approximately 5.5%. Other estimates could place that anywhere between 3% and 16%. Some of this has already happened with the rising federal minimum wage. This effect was not nearly as large as the unemployment of teens due to the Great Recession (teen employment fell from 165,000 in 2005 to 108,000 in 2009) but the rise in the minimum wage did not help.

In Minnesota 93,000 workers made the minimum wage in 2011. 32,000 of them are teenagers, of which 29,000 work part-time. The number of workers who work at the minimum wage full-time and are over age 24 is only 18,000 of that number (there are almost 2.5 million workers in Minnesota). According to a 2007 CBO study, workers below 200% of the family poverty guidelines receiving higher wages due to a minimum wage increase only received 44% of the total rise in wages; the rest went to those above 200% of the family poverty guidelines.

A decline in employment, if true, is a serious issue for those with low skills. Teens, particularly those from difficult circumstances, must find ways to signal employers that they have the skills needed to hold jobs. Often those involve little more than courtesy, punctuality, the ability to make change, to work with others, etc. Teens take low wages to gain that opportunity, and they are frustrated by higher minimum wages. The employer will be less likely to “take a chance” on a young person as the wage that must be paid becomes higher. That loss of experience may lead to lower wages throughout the rest of that teen’s life.

Moreover, the wage is only one feature of an employment contract. Stricter discipline is possible on almost any job, which makes it less enjoyable for the employee. So too could work conditions change, such as fewer coffee breaks, less heating and air-conditioning, requirements to buy your own uniform, fewer vacations, and less fringe benefits. Employers will seek workers who are willing to tolerate worse working conditions. Competition still pushes the value of the job down, even when that is not expressed by wages. Workers who do not want these worse conditions either must find work in industries uncovered by the minimum wage or work for themselves.

The minimum wage for the self-employed is $0.

Minimum wage laws thus have many effects beyond whether someone keeps or loses a job. They influence how people live in the working world, and not in ways the law’s proponents can predict. It is better to trust the negotiation over terms and conditions of employment to those who will live under them, not those in St. Paul and Washington.

(This article is cross-posted from The Center of the American Experiment.)

One problem with government policy like the minimum wage is the absence of a limiting principle. If $9 is good, why not $10 or $20? I can think of a half-dozen arguments for why higher is better. I fear the economic effects described by Mr Banaian are too subtle for most people to grasp. Besides, there are contradictory studies and data to cling to.

The trouble is twofold:

The assumption that legislation changes economic reality. If we make the minimum wage $20/hr, no one will be poor because everyone will make over $40k per year. This kind of thinking pervades Leftist ideology and it extends beyond economics. Changing the name of something (retarded, mentally deficient, developmentally disabled) does not change reality. Derogatory language usage catches up too.

Freedom is undermined. Individuals do not have autonomy over their labor if they cannot offer it for any price they wish. Few things are more important than how we allocate our time, and labor is a significant part of that allocation. Besides, it is how we earn the necessities and luxuries of life. Don’t mess with it.

Econometrics has limited appeal for voters. It’s only part of the story.

If prevailing market demand for labor is at or higher than the minimum wage, the effect on unemployment is minimal. If the minimum wage is raised above the prevailing market value, workers will be replaced by capital and unemployment goes up.

Another reason why a minimum wage dampens employment is because it drives up the cost of unemployment insurance for the business owner, making him or her less likely to hire.

Since unemployment benefits are based on how much the beneficiary made while employed, a higher minimum wage will mean higher benefits and higher insurance premiums. I imagine minimum wage workers are much more likely to go on unemployment as well, although I don’t have any statistics to back that up.

Here in the Midwest the cost of living is less, and people are paid less, than on either coastal sides. So, an increase in the federal minimum wage will have a negative impact. It will discourage new hires, and discourage businesses expansion. Also, will discourage business start-ups. The added cost to a businesses bottom-line, could even kill some existing businesses.

In the rust belt, we don’t have a labor shortage, we have a business and employment opportunity shortage. Our labor base tends toward people who have less formal education, less computer, and technical knowledge. New hires often need extensive training to be able to do the job. Which evens out over the long run if a business is not paying high wages. So, ratcheting up new hire business costs, is a bad idea.

@drlorentz in a piece I am writing for legislators, I note that in a survey in 2003, 72% of the general public supported an increase in the minimum wage. We’ve known this for years. So what? Are we supposed to lie about the econometrics when proponents keep shoving those few hey-no-problem studies at us?

Here’s the problem: Is there nobody helped by the minimum wage? Of course not. Some people are going to keep their jobs and make more money. (Their work conditions may suck a little more, but perhaps they wanted that tradeoff more than their employers did. We don’t know.) Lots of others will lose and the losses will be greater than the gains. But they don’t fall evenly, and that’s why politics gets involved.

King Banaian: @drlorentz in a piece I am writing for legislators, I note that in a survey in 2003, 72% of the general public supported an increase in the minimum wage. We’ve known this for years. So what? Are we supposed to lie about the econometrics when proponents keep shoving those few hey-no-problem studies at us?

Lie? Hardly. Your survey result (72%) shows that your approach isn’t working. No matter how loudly you declaim your view, based on econometrics, few are convinced, perhaps for good reason. Hayek explains why one should be skeptical of such data.

Your antepenultimate paragraph (starting with Moreover) has some excellent points. Such arguments could sway people, though they might backfire by causing further regulation of the workplace (employers must provide uniforms, more benefits, maintain specified temperature range).

Rather than suggesting that you lie, I suggest you take up the broader case, both in the economic sphere as George Gilder and Arthur Brooks do, and in the culture at large. The minimum wage issue turns on moral questions, not on “on a set of case studies.” That’s why the other guys are winning.

The problem we face is that people can imagine themselves in the position of a low-paid employee but not the employer, and liberals are very good at playing off this cheap empathy to advance their agenda.

Maybe we need better analogies to get people to view the argument from the other side? “Would you be in favor of a minimum price for airline tickets? Airlines are suffering, and I’m sure they could use the extra revenue. Oh, and the price will occasionally go up by 10, 20, 30% regardless of the quality of service. Would you be more or less likely to hire an airline to transport you if tickets cost twice what they do today? Now replace the word ‘airline’ with ‘low skilled worker’.”

People need to be made aware of the hidden costs of these regulations – everyone howls when the price of a stamp goes up to help the “poor” post office because the cost (to them) is obvious.

@drlorentz In any welfare analysis we teach in economics, we teach that the social loss of a price floor or ceiling rises exponentially as one increases the floor further above the equilibrium. The costs grow geometrically. So it’s pretty normal to argue that small changes have less impact but bigger ones much larger, and that’s where the limiting principle applies.

@fastflyer exactly so. And that’s a real loss for training inexperienced workers, as there becomes a bigger hurdle for them to enter the labor force.

“Small changes have less impact but bigger ones much larger.” Try campaigning on that somewhat tautological slogan or using it to change a congressman’s mind. The argument has to be broadened and elevated to succeed with voters and, by extension, their representatives. You’ve missed the point. Wonky arguments based on easily disputable facts never carry the day. That’s why the Left is winning. Arthur Brooks (AEI) and George Guilder are closer to the mark. Also consider that most voters never took your Econ class.

If politicians really want McDonald’s workers to have $9/hour, they can do it with the EITC instead of a minimum wage. It’s a much better option.

I take issue with the studies on minimum wage. They can measure the immediate effect of a change in the minimum wage, but they can’t measure the innovation that does not take place because the minimum wage exists. Who knows what uses employers might find for very low-skilled teenagers if they were allowed to hire them for $4/hour?